Real Estate Tax Calc
The personal-use day test
The IRS classifies a short-term rental as a vacation home if personal use exceeds the greater of: 14 days per year, or 10% of the days you rented it at fair rental price. Under vacation-home status, deductions are limited to rental income — you cannot create a net loss, and depreciation that would produce a loss is suspended.
Full rental property treatment
If personal use stays below the 14-day / 10% threshold, the property is treated as a full rental for tax purposes. You depreciate it over 27.5 years under MACRS (residential), and a cost segregation study can accelerate deductions on components such as appliances, fixtures, and land improvements. This is the foundation of the so-called STR loophole — see the cost segregation guide for STRs for details.
Material participation and passive losses
Short-term rentals with an average rental period of 7 days or fewer are generally not classified as rental activities under the passive activity loss rules. This means if you materially participate in the activity, the paper losses from accelerated depreciation may offset your ordinary income without requiring Real Estate Professional Status. The rules are technical — consult a CPA before relying on this treatment.
27.5-year vs. 39-year: the schedule can change
Most owners assume a short-term rental depreciates over 27.5 years like any residential rental. That is often true — but not always. If you provide substantial services to guests in the manner of a hotel (daily cleaning, meals, concierge, linens changed mid-stay), the IRS may treat the property as a transient lodging business rather than residential rental real estate, pushing it to the 39-year nonresidential schedule. The distinction also affects whether income lands on Schedule E or Schedule C. The building's recovery period matters less to a cost-segregation strategy (which targets the short-life components) but materially changes the depreciation on the structural shell, so pin it down early.
Schedule E vs. Schedule C — and self-employment tax
Where you report the STR follows the same substantial-services line. A typical short-term rental with only minimal or routine services (utilities, basic cleaning between guests, trash) is reported on Schedule E, and the income is not subject to self-employment tax. But if you provide substantial hotel-like services, the activity can be a trade or business reported on Schedule C, where net income is hit with 15.3% self-employment tax on top of income tax. Many hosts unintentionally create SE-tax exposure by over-servicing. If your goal is the depreciation loss without SE tax, Schedule E treatment is usually preferable — keep services light and document them.
The 7-day rule, in detail
The 'not a rental activity' treatment comes from Reg. 1.469-1T(e)(3), which excludes an activity from the definition of a rental activity when the average period of customer use is seven days or less (or 30 days or less with significant personal services). 'Average' is measured across all stays for the year — total rental days divided by number of separate rentals. Because these activities are not 'rentals' under Section 469, they escape the automatic passive label that otherwise applies to real estate. That is the doorway to using the losses against active income. But escaping the rental label only helps if you clear the next hurdle: material participation.
Material participation tests for an STR
To treat a non-rental STR's loss as non-passive, you must materially participate under one of seven regulatory tests. The most commonly used by hosts are: the 500-hour test (500+ hours in the activity); the substantially-all test (you do essentially all the work); and the 100-hour test (100+ hours and no other individual — including a cleaner or co-host — does more). Self-managing hosts often reach the 100-hour bar through guest communication, listing management, cleaning coordination, supply runs, and maintenance. Using a full-service property manager generally defeats these tests, since the manager does most of the work. Keep a contemporaneous log, just as with REPS.
Cost segregation on an STR — a worked example
Suppose you buy a $500,000 beach condo used purely as an STR; the depreciable building basis after removing land is $420,000. A cost segregation study reclassifies 25% — $105,000 — into 5-, 7-, and 15-year property. With 100% bonus depreciation in the placed-in-service year, that $105,000 is deductible in year one, plus first-year MACRS on the shell. If you materially participate and the average stay is seven days or less, the resulting ~$110,000+ paper loss is non-passive and can offset your W-2 or business income — without needing Real Estate Professional Status. In a 32% bracket, that is roughly $35,000 of first-year federal tax deferred. This is the mechanics behind the widely discussed 'STR loophole.'
The exit: recapture on an STR
The deferral has a back end. At sale, depreciation on the building is unrecaptured Section 1250 gain taxed up to 25%, and depreciation on the cost-segregated 5-/7-/15-year components is Section 1245 recapture taxed at ordinary rates. If you accelerated heavily and then sell outright in a high bracket, a good share of the benefit returns as recapture. The strategy is strongest when you hold long term, roll into a replacement property via a 1031 exchange (real property only — furniture and appliances are no longer like-kind), or hold until death for a stepped-up basis. Plan the exit when you plan the study.
Allocating mixed personal and rental use
If you also use the property personally, you must allocate expenses and depreciation between rental and personal days. Under vacation-home status (personal use over the 14-day / 10% threshold), Section 280A limits total deductions to rental income and dictates the order in which deductions are applied — mortgage interest and taxes first, then operating costs, then depreciation last — so depreciation is often the deduction that gets suspended when income runs out. Suspended amounts carry forward to future years. Track personal-use days meticulously (including use by family and below-market guests), because a single miscount can flip the property between full-rental and vacation-home treatment.
Furniture and appliances are their own depreciation lane
A furnished short-term rental holds a lot of value in tangible personal property — beds, sofas, dining sets, televisions, kitchenware, and appliances — that is separate from the building. This property is generally 5- or 7-year MACRS property and, when placed in service, can be bonus-depreciated or expensed under Section 179 or the de minimis safe harbor (items up to $2,500 each). You do not even need a formal cost segregation study to capture the furnishings — a detailed inventory with costs will do. Because STRs are furnished and re-outfitted regularly, this lane produces recurring first-year deductions that long-term rentals rarely see. Remember, though, that this property is Section 1245 and its depreciation is recaptured at ordinary rates at sale.
When the '7-day' STR strategy does NOT apply
The favorable non-passive treatment has real boundaries, and misapplying it is a common error. It does not apply if your average guest stay exceeds seven days (then it is a normal rental activity, passive unless you have REPS) — many 'monthly' or corporate rentals fail here. It does not help if you do not materially participate (a full-service property manager doing most of the work generally defeats the tests). It does not create a usable loss if the property is under vacation-home (Section 280A) limits because of personal use. And it does not exempt you from self-employment tax if you provide substantial services on Schedule C. Confirm each element — average stay, participation, personal use, and services — before relying on the strategy.
Recordkeeping that survives an audit
Because STR losses can offset active income, the IRS scrutinizes them. Keep the evidence an examiner will ask for: a reservation-level log showing each booking's dates so you can prove the average stay is seven days or less; a contemporaneous time log documenting your material-participation hours (guest communication, cleaning coordination, supply runs, maintenance, listing management) tied to dates and tasks; a personal-use calendar distinguishing rental days, personal days, and repair/maintenance days (which generally are not personal-use days); and, if you cost-segregate, an engineering-based study plus a furnishings inventory. Platform statements from Airbnb/VRBO, cleaning invoices, and message threads all corroborate the picture. Thin documentation is the fastest way to lose an otherwise valid position.
The 1099-K and how income is reported
Booking platforms such as Airbnb and VRBO issue Form 1099-K reporting the gross amount they processed for you, and the reporting threshold has been declining, so more hosts now receive one. Two points matter. First, the 1099-K shows gross proceeds — before platform service fees, cleaning fees paid out, and refunds — so the figure will exceed your actual net rental income; you report gross income and then deduct the fees and expenses, rather than assuming the 1099-K number is your taxable income. Second, receiving a 1099-K does not by itself decide Schedule E vs. Schedule C — that still turns on whether you provide substantial services. Reconcile the platform's figures to your own booking records each year so your reported income ties out and you capture every legitimate deduction.
Frequently asked questions
Can I depreciate an Airbnb rental?
Yes, if personal use stays below 14 days or 10% of rental days. If it exceeds those thresholds, vacation-home rules limit deductions to rental income with no net loss allowed.
Does a short-term rental qualify for bonus depreciation?
If the property qualifies as a full rental, cost-segregated components generally qualify for bonus depreciation under current phase-down rules.
Do I report my Airbnb on Schedule E or Schedule C?
Schedule E if you provide only minimal, routine services (no self-employment tax). Schedule C if you provide substantial hotel-like services, which subjects the net income to 15.3% self-employment tax.
Do I need Real Estate Professional Status to use STR losses against my W-2?
No. If the average guest stay is seven days or less and you materially participate, the losses are non-passive without REPS — that's the essence of the STR strategy.
Is a short-term rental depreciated over 27.5 or 39 years?
Usually 27.5 years as residential rental property. But if you provide substantial hotel-like services, it can be treated as transient lodging and depreciated over 39 years.
How many hours do I need to materially participate in my STR?
Commonly 500 hours, or 100 hours if no one else (including a cleaner or co-host) does more, or essentially all the work yourself. Keep a contemporaneous log to prove it.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.